Eurozone May Be Running Out of Time on Debt Crisis

The eurozone debt crisis is moving at such a pace, with pressure now mounting on several countries simultaneously, that European Union institutions may find it impossible to get ahead of the markets.

After Greece's deficit and debt problems emerged in late 2009, there were five months of steadily rising Greek sovereign bond yields and efforts by EU officials to contain the threat before a 110 billion euro ($140 billion) bailout was arranged.

The lag was understandable because the EU had never had to deal with such a crisis since the euro's introduction in 1999.

Once a rescue mechanism was agreed for Athens, it was only a matter of days before the funds were disbursed.

In the case of Ireland, it took weeks of market pressure driving bond yields higher — with the spread over German bunds widening — before Ireland requested help, an EU-IMF team was dispatched, and an 85 billion euro bailout was assembled.

But now financial market pressure is being brought to bear on Portugal, Spain, Belgium and Italy all at once.

In theory the EU has a mechanism in place to try to stave off the pressure, and can act within hours via conference calls to take decisions. However, there are doubts about whether it is nimble enough to outwit or get ahead of the markets, and whether there is enough money to douse the spreading flames.

"When it comes to EU politicians and the markets, there is definitely an asymmetry of arms," said Hugo Brady, a senior policy analyst at the Centre for European Reform, a think-tank.

"One criticism has been that political leaders move incrementally, rather than in big steps, for understandable reasons," he said, pointing out that politicians have voters and their constituencies to consider, which markets do not.

"In my view, the period of sending signals to the markets and seeing how they react has to end. It's not a game the politicians are winning."

Radical Options

The 16 eurozone countries have, in theory, 750 billion euros at their disposal to combat the crisis. Of the total, 250 billion comes from the IMF, 440 billion from eurozone governments and 60 billion from the 27-country EU.

So far, only about 60 billion has been disbursed — in Dublin's package about 25 billion came from its own coffers and bilateral loans. Greece's bailout was a separate agreement.

With at least 650 billion euros still available, eurozone countries should be able to handle a bailout of Portugal and possibly even Spain, if Lisbon and Madrid request aid. In such an eventuality, technical teams could be dispatched within days and money could be released around a week to 10 days later.

In the scheme of sovereign bailouts, that is lightning quick, and when it comes to the European Union, the institutional wheels can seldom have moved so quickly.

But panicked investors, or speculators betting that Portugal, Spain and others may be forced to accept bailouts, can take decisions remotely and move billions of euros in seconds, applying almost instantaneous pressure.

For those in financial markets, the sense that the EU does not have a clear and reliable take on the situation — notwithstanding the time and effort officials are putting in — is enough to lose faith and decide to get out.

"The politicians in Europe as a group, and perhaps an orchestrated group, keep putting out the message that everything is fine when it is obviously not," said Mark Grant, managing director of Southwest Securities in Florida and the author of the financial commentary "Out of the Box."

"There reaches a point, which arrived yesterday in my opinion, when the investment community's faith was breached one too many times and now people are fleeing the scene," he said, pointing to the falling euro and rising eurozone yields.

The eurozone may now find itself having to consider radical decisions to move ahead of the crisis.

On Sunday, EU finance ministers laid out details of the European Stability Mechanism, which will involve private bondholders sharing the cost of any sovereign debt default or restructuring. But it comes into effect only in mid-2013.

To handle the current situation, analysts are now suggesting solutions that in the minds of many EU leaders would be unthinkable, such as turning the eurozone into a full fiscal union, with all risks effectively shared out equally.

To Germany and others, that is anathema.

"It would mean creating a working fiscal transfer system...and somehow all the sovereign debts of member states being assumed. But that is science fiction talk," said Brady.

Another possibility bandied around would be for the eurozone to raise funds collectively, issuing hundreds of billions of euros of paper and selling it to China. The money would be used to finance eurozone borrowing at better rates than the market is demanding and would run until the crisis has passed.